Switch Before It Is Too Late

While buying ULIPs, what many people do not know is that they have an option of managing their investments and make sure that it yields maximum returns. Generally, ULIP invests your money either in share market, known as market-linked instrument; or in bonds and other fixed income securities, known as debt instruments. Usually, insurance policies give you a choice of moving your money from debt to market-linked instruments, and vice-versa. If you don’t do it, your insurer manages your ‘debt-equity’ ratio, on basis of your age, which is called ‘wheel of life’ strategy.

Investment Options In ULIPs:

To manage your investments, you are given an option of shifting funds from one instrument to another. This facility is called ‘switching’. In switching, you sell your investments in one instrument and buy units in other instrument, let’s say from debt to equity, while you fund value remains the same. Here, it is important to note that partial switching is also possible and provided by almost all the insurers.

Let’s understand switching better with the help of an example. If you have 10,000 units of equity fund and the NAV of equity fund is Rs 10; your fund value will be 10*10000= Rs 1 lakh. Now, you want to change your equity units to debt-based units, expecting the market will fall in coming months. If the NAV of debt fund is Rs 20, you have to sell your equity at the NAV of Rs 10 and invest Rs 1 lakh in debt fund at Rs 20, you will get 1,00,000/20 = 5,000 units of ‘debt fund’. This money will now grow with debt market and has nothing to do with equity further. This process is called ‘switching’. Many policies let you switch your funds for a number of times, without any charges, in each policy year. Others charge an amount, called ‘switching charges’.

Here, if you want your future premiums to be invested into debt directly, you will have to use a facility called ‘premium redirection’, which ensures the re-direction for future premiums.

Switching Charges:

Factors Deciding Switches

Now, the question remains, what factors should an investor consider before switching the money from one instrument to another? What is the best time to switch funds? How do you know which fund is best for you? The answer to all these questions lies in the following points.

1. Age: Your age talk a lot about your risk bearing capability. If you are young, you are considered aggressive as you have lesser responsibilities on your shoulder. In times like these, you have more will and cushion to take additional risks to earn extra returns. Thus, you should look at aggressive funds such as equity and equity-related funds. Similarly, when married and have children, you would be investing safe with balanced funds or blue-chip funds. Blue-chip funds invest in shares of large companies, which are less volatile. On the other hand,  aged people would want to tread cautiously with debt, money-market and liquid instruments. 

2. Goal of investment and investment horizon: Find out your goal first and check whether your investment avenue suits your goal and horizon. It would be in your best interest to change your investment avenue, if it is not aligned with your goals.. Let us understand this with the help of an example. Harish invest for his son’s higher education, the investment horizon being 15 years. Let the current cost be Rs 5 lakh, with 6 per cent inflation assumed; he would requires around Rs 12 lakh, after 15 years. This effectively means that he would have to invest in such a fund that would grow at 8 per cent CAGR (as calculated by HDFC calculator). If Harish invests in debt fund, it would give him an effective return of 5-6 per cent; hence he should look at more aggressive options to invest in, to fulfill his investment goal.

3. Your financial condition and portfolio: If you have other investment avenue in your portfolio, you should align the payout from this investment to your total payout and rejig your portfolio for better alignment with your goals of investment. For instance, if you have already saved for a holiday with your family, ULIP maturing at the same time would make you spend more money than you have actually thought, or worse, you might not be able to fulfill you goal for which you originally invested in the ULIP.

4. Volatility the stock market: Volatile stock market is crucial for equity investments. In case, you are a regular investor in equity, you can get cushion from volatility and make money through technical investment. But if you are not very well versed with the market anomalies, this could deter your investment. In times like these, it is advised to shift your money to balanced funds to take advantage of both debt and equity. In balanced funds, whether market gains or losses, a part of your investment will grow.

5. Current and expected interest rates: Interest rates have a great deal of effect on your investments, be it in bonds or in share market. Historically, investors prefer to lock-in their funds in fixed deposits with higher interest rates. They sell their investments in shares and other riskier avenues to take advantage of higher rates. This is the time when the stock market overflows with more shares and lesser takers, bringing down the prices of shares. At this time, buy shares at lower prices for future and shift your existing funds from equity to debt.

6. Macro-economic condition: The macro-economic have an effective impact on your decision to keep funds in equity or debt market. For example, in times of inflation, the government would want to lessen money in hands of people (liquidity), and hence increases interest rates, having a impact on equity market. In rising inflationary conditions, it is best to sell equity and invest in debt, since inflation would raise deposit interest rates and lessen bond prices, which would help you buy bonds, when they are cheap.

Conclusion

Switching is a facility which is given to you for your advantage. It is up to you to take maximum advantage of this facility to maximize your returns. Through switching, you are empowered to make best possible use of your hard-earned money to earn best possible returns. So, go ahead and make a wise decision.